Last September I wrote and article with the same headline (Part I) shortly after the gold market had a big selloff. In that article, dated September 13, 2007, I told investors to not worry, that gold would be going much higher. On that date, the New York spot price was $590 an ounce. Today, as I write, gold is trading in New York at $651 an ounce. So despite all the negativity last September, here we are $61 an ounce higher just five months later. And that is after this week’s selloff. Gold had hit $688 just the week before. The point I am trying to make is that investors need not worry when gold has an aberration to the downside. It will usually be short-term in nature, despite what the mainstream media is telling you.
The past few trading days we saw another big selloff, prompting the faint of heart to once again exclaim:
Is this it for gold? Has the high for gold already been hit?
And don’t be surprised that the mainstream media is once again jumping on the opportunity to write gold’s epitaph. That is what they do. Pay no attention to them. Relax, don’t worry, and be happy! Gold will shortly be moving to new highs
So what are the real reasons that gold has sold off this week? And how long will this activity last?
First, it was only a matter of time before the world experienced a correction in one or more of the grossly overinflated paper stock markets. The 9% plunge in China’s Shanghai stock market on February 27 caused the biggest drop in that index in a decade and wiped out more than $100 billion in stock market capitalization. That in turn caused a rapid flurry of selling in other global stock markets, with the Dow Jones Industrial Average down 416 points for the day.
Normally, when there is a meltdown in the stock market, we would see gold move up. But just the opposite occurred.
That is because many profitable gold positions in China were being liquidated by those who lost money in the Shanghai stock market. This activity spread to other global investors who needed to raise cash to cover losing positions. Unfortunately, gold is taking it on the chin as these investors in China and elsewhere raise money to cover their paper losses.
I see this activity clearing up shortly and gold resuming its upward trend to a new high.
Just ask yourself the following questions: Has anything fundamentally changed? Has the U.S. Government suddenly become fiscally responsible? Are people more willing or less willing to buy and hold dollars and treasury bills? Is the world a safer place or a more dangerous one? Are the risks in the financial world lessening or increasing? I believe most of you already know the answers to these questions, in which case I shouldn’t have to tell you where the gold price is going.
Look at the latest list of other insane financial risks that exist in today’s markets:
- The sub-prime mortgage debacle that is happening in the U.S.
- The unwinding of the Japanese yen carry trade
- Russian, Indian and U.S. stock markets that all look ridiculously overvalued
- The $345 trillion derivatives market mess
- Growing geopolitical risk that seems to have no solutions
This most recent selloff in gold is just another short-term aberration in the gold price. I fully expect gold to reach new highs before the end of this year. How many times have we been through this drill the last six years? For me it is almost boring. Gold moves to a new high, then corrects back. Suddenly there is a big selloff, causing the weak hands to liquidate their positions–and then gold moves to yet another new high. Look at the chart for the past six years.
I believe gold will surprise many by moving into a super bull market in the near future as the dollar resumes its inevitable drop to much lower levels.
So take all this in stride and sleep well at night. RELAX. This is a buying opportunity.
Don’t worry, be happy! Gold is going higher!
Until next time,
Greg McCoach
